Big infrastructure, big uncertainty

One of the peculiar features of debates about big monolithic infrastructure projects, such as universal broadband networks and high-speed rail lines, is the way their supporters talk about them in public. To advocates, the wisdom of these projects is obvious. You can never have too much broadband! High-speed rail is the future! Why can’t we be like the visionaries who built the Snowy Mountains Scheme?!? $50 billion, $100 billion? “Chicken feed” is what we’ll call it in 20 years!

And indeed some opponents of these projects take the same attitude from the other side of the fence. Everything’s fine as it is! This new thing will be an enormous white elephant, obsolete before it is finished, you can bet on it!

What we don’t usually talk about is Knightian uncertainty – that is, risk you don’t know enough to quantify, or sometimes even recognise.

This was what former US defence secretary Donald Rumsfeld was talking about when he famously spoke of “unknown unknowns“. That Rumsfeld’s comment is frequently ridiculed just shows how alien considerations of uncertainty are in the public discourse*. Almost no-one wants to say, “well, we just don’t know”. There are things you might do if you just don’t know. They rarely get talked about.

But if you’re having a serious conversation about infrastructure, you have to talk about uncertainty. Uncertainty matters a lot for big monolithic infrastructure projects, such as universal broadband networks and high-speed rail lines: the time they take to complete and the technology environments in which they operate mean there’s great uncertainty about their ultimate benefits and ultimate demand. By the time you deliver them, the world may be in the process of passing them by. Demand risk is always a factor in these projects, but here we seem to have substantial demand uncertainty, which is worse.

This may be particularly true over the next few years, because predicting infrastructure demand growth seems a tough job right now. In the broadband business, you have to make a guess about the capability of mobile broadband and about willingness to pay for ultra-high-definition video streaming. In more traditional infrastructure, car and power use are currently and unexpectedly declining, and we don’t know whether these developments are structural or cyclical (and if they’re structural, we don’t know whether they are new trends or one-off adjustments).

My gut feel is that the shape of our transportation and communications networks is less predictable now than at any time in the past 50 years. Maybe I’m wrong. But that’s Knightian uncertainty for you: you can’t really size it up.

A few people are looking at the effects that technology forecasting has on infrastructure projects. From rail transport analyst Christian Wolmar:

One of the reasons for my scepticism about [UK high-speed rail project] HS2 is on the basis that it does not take into account future development of technology. Just look at how technology has changed since 1993 when mobile phones had barely taken root, Google, Facebook and Twitter were but twinkles in their founders’ eye and digital TV was just starting. Will there really be enough people wanting to pile into what are likely to be expensive trains in 20 years time to justify the huge expenditure on this project?

And here’s where I stick my neck out. The next big technology, one with such huge implications that it is impossible to being to predict them, is driverless cars … Perhaps they will start by being driven only on motorways but even that would have enormous consequences. It would combine many of the advantages of train travel with the flexibility of car use. Think trucks, too. The economics of transport would change as radically as they did when the railways were first developed. The time frame may be a decade or two, but the consequences will be much more far reaching than, say, the much talked-about electric cars. The driverless car – or rather motor vehicle – is the innovation that we ought all to be taking into account in our future thinking.

From University of Minnesota mathematician and network capacity expert Andrew Odlyzko:

How many times have you seen predictions and promises that better communications, such as faster Internet access, will stimulate telecommuting and decrease road congestion?Such predictions are almost certainly wrong. At least they have been consistently wrong for about two centuries. Many, often very knowledgeable, observers, thought that transportation and communication were substitutes for each other. But the uniform experience to this age has been that they are complements, and grow in parallel. Yes, you may work from home, but chances are that you will make more trips to meet clients, or for family and other reasons, and in the end will travel more than before (barring major upsets, such as astronomical rise in price of fuels).

So what can we conclude? Most of all, that the future is hard to predict, so we have to prepare for the unexpected. Second, though, we should keep in mind that among the most common unexpected phenomena is the resilience of old technologies, services, and business methods, and their propensity to adopt some of the innovations that we work on.

If we conclude that big monolithic infrastructure projects need to factor in uncertainty, what do we do?

The simplest course is to raise our estimation of the risks. But how much? Bent Flyvbjerg recommends a technique called “reference class forecasting“, which predicts the outcome of a planned action based on actual outcomes in a “reference class”. But what’s the right reference class, and how useful are past projects, when the environment is changing fast?

Another option is to try to break down the project into smaller units, which we can tackle one by one. That only goes so far with high-speed rail, where we essentially have just three big legs (Melbourne to Canberra, Canberra to Sydney and Sydney to Brisbane). It does make a lot of sense for a fibre-to-the-premises broadband network, since such a network is by its nature mostly local in nature. It’s why we should be improving our existing broadband networks suburb by suburb, as suggested by Joshus Gans in a paper for CEDA back in 2007.

We should also, of course, adjust our thinking about such monolithic infrastructure – “megaprojects”, as Flyvbjerg has dubbed them. If the most recent study of the Melbourne-Sydney-Brisbane high-speed rail system says the environmental benefits mostly emerge from around 2057, for instance, we should probably avoid making very much of those benefits.

But first, we need to talk about big infrastructure as if uncertainty mattered. The unknown unknowns are real, and we need to acknowledge them.

Strong incentives and weak disincentives may have taught project promoters what there is to learn, namely that cost underestimation and overrun pay off. If this is the case, cost overrun must be expected and it must be expected to be intentional.

* Note: You don’t need to agree with Rumsfeld about the conduct of US defence policy in order to think he was, on this occasion, talking sensibly about risk. As John Quiggin has noted in his own defence of Rumsfeld’s comments, the bloke could have usefully thought more and earlier about the repercussions of Knightian uncertainty for US attempts to reshape the Middle East through a war in Iraq.